The Political Economy of Brexit and the UK's National Business Model - Edited by Scott Lavery, Lucia Quaglia and Charlie Dannreuther - SPERI

SPERI Paper No. 41

The Political Economy
of Brexit and the UK’s
National Business
Model.

      Edited by Scott Lavery, Lucia Quaglia and
                          Charlie Dannreuther

About SPERI
The Sheffield Political Economy Research Institute (SPERI) at the University of Sheffield
brings together leading international researchers, policy-makers, journalists and
opinion formers to develop new ways of thinking about the economic and political
challenges by the current combination of financial crisis, shifting economic power and
environmental threat. SPERI’s goal is to shape and lead the debate on how to build a
sustainable recovery and a sustainable political economy for the long-term.

                                                                                            ISSN 2052-000X
                                                                                    Published in May 2017

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model   1

                                      Content

Author details                                                                           2

Introduction                                                                             4
Scott Lavery, Lucia Quaglia and Charlie Dannreuther

The political economy of finance in the UK and Brexit                                    6
Scott James and Lucia Quaglia

Taking back control? The discursive constraints on post-Brexit                          11
trade policy
Gabriel Siles-Brügge

Paying Our Way in the World? Visible and Invisible Dangers of                           17
Brexit
Jonathan Perraton

Brexit Aesthetic and the politics of infrastructure investment                         24
Charlie Dannreuther

What’s left for ‘Social Europe’? Regulating transnational la-                          33
bour markets in the UK-1 and the EU-27 after Brexit
Nicole Lindstrom

Will Brexit deepen the UK’s ‘North-South’ divide?                                      40
Scott Lavery

Putting the EU’s crises into perspective                                               46
Ben Rosamond

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model   2

Authors
Scott Lavery is a Research Fellow at the Sheffield Political Economy Research In-
stitute (SPERI) at the University of Sheffield. His research interests lie at the inter-
section of British, European and International Political Economy and focuses on the
changing configuration of capitalism in the aftermath of the 2008 crisis, with a spe-
cific focus on labour markets, regional economic development and state theory. He
has published in New Political Economy amongst other publishing outlets and co-
leads SPERI’s ‘European Capitalism and the Crises of the EU’ research programme.

Lucia Quaglia (DPhil Sussex) is Professor of Political Science at the University of
York. Her most recent books include; (with D. Howarth) The Political Economy of
Banking Union (Oxford University Press. 2016) and The European Union and Global
Financial Regulation (Oxford University Press. 2014). Together with D. Howarth, she
was the guest co-editor of the special issue of the Review of International Political
Economy on ‘The Political Economy of the Sovereign Debt Crisis in the Euro area’
(2015). Together with D. Hodson, she was the guest co-editor of the special issue of
the Journal of Common Market Studies on ‘The Global Financial Turmoil: European
Perspectives and Lessons’ (2009). Her work has been published in journals, such
as Review of International Political Economy, New Political Economy, Governance,
European Journal of Political Research, Journal of Public Policy, Journal of Euro-
pean Public Policy, Journal of Common Market Studies, and West European Poli-
tics. She was awarded research fellowships from the Hanse-Wissenschafts Kolleg,
the University of Bremen, the Fonds National de la Recherche in Luxembourg, the
Max Planck Institute in Cologne, the Scuola Normale Superiore and the European
University Institute in Florence.

Charlie Dannreuther works from the School of Politics and International Studies
at the University of Leeds. His main research interests include SME policy in the UK
and the EU and Systemic Risk and the Global Financial Crisis. He currently works
on Brexit and developing an IPE of Touch based on a research agenda exploring
the sensory significance of the seaside. He has published in Review of International
Political Economy, Capital and Class, International Small Business Journal, Journal
of European Public Policy.

Scott James is a Senior Lecturer in Political Economy at King’s College London,
and a Visiting Fellow at the Blavatnik School of Government, University of Oxford.
His research concerns the political economy of banking reform, the UK’s role in
shaping post-crisis financial regulation, and the implications of Brexit. From 2012-14
he was Principal Investigator for the ESRC-funded ‘Voices in the City’ project which
analysed bank power and financial lobbying networks in the UK and EU.

Gabriel Siles-Brügge is Associate Professor in the Department of Politics and In-
ternational Studies at the University of Warwick, having previously worked at the
Universities of Manchester and Oxford Brookes. His research interests lie at the
intersection of European and International Political Economy, where he specialises
on issues relating to trade and investment and the politics of economic ideas. He is
the author of Constructing European Union Trade Policy: A Global Idea of Europe
(Palgrave Macmillan. 2014), the co-author of TTIP: The Truth about the Transat-
lantic Trade and Investment Partnership (Polity. 2016) and has published articles

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model   3

in such journals as the Journal of European Public Policy, the Journal of Common
Market Studies, New Political Economy and the Review of International Political
Economy.

Jonathan Perraton is Senior Lecturer in Economics at the University of Shef-
field and an Associate Fellow of SPERI. He is co-author of Global Transformation:
Politics, Economics and Culture and co-editor of Where are National Capitalisms
Now? Jonathan has also published academic articles on economic globalisation
and political economy.

Nicole Lindstrom’s research and teaching interests lie in comparative and inter-
national political economy and public policy, with a particular focus on political
economic transformations in the enlarged European Union. Before moving to York
in 2007, she was a member of the Departments of International Relations and Euro-
pean Studies and Political Science at the Central European University in Budapest.
She held a visiting position in the Graduate Program of International Affairs at The
New School for Social Research and was a visiting fellow at the Centre for the Study
of Globalisation and Regionalisation at the University of Warwick. She is the author
of The Politics of Europeanization and Post-socialist Transitions (Palgrave. 2015),
and her articles have appeared in the Journal of Common Market Studies, Govern-
ance and New Political Economy, amongst others.

Ben Rosamond is Professor of Political Science at the University of Copenhagen
where he is also Deputy Director of the Centre for European Politics. He is founding
co-editor of Comparative European Politics and principal investigator of the inter-
disciplinary ‘EuroChallenge’ research project (www.eurochallenge.dk). His books
include Theories of European Integration (Macmillan. 2000), Handbook of Euro-
pean Union Politics (co-editor, Sage. 2007) and Handbook of the Politics of Brexit
(co-editor, Routledge. forthcoming). He works at the interface of European Union
studies and international political economy with current emphases on the political
economy of European disintegration and the interplay between academic and pol-
icy knowledge in the European integration process. He has held visiting positions
at the Australian National University, Columbia University, New York University, the
University of Edinburgh and the University of Oxford amongst others. His work has
appeared in journals such as the British Journal of Politics and International Rela-
tions, Cooperation and Conflict, European Journal of International Relations, Inter-
national Affairs, Journal of Common Market Studies, Journal of European Public
Policy, New Political Economy, Political Studies and Review of International Political
Economy.

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model                             4

Introduction
Scott Lavery1, Lucia Quaglia2 and Charlie Dannreuther3
The UK’s economy is underpinned by a distinctive variety of capitalism or ‘national
business model’. One distinguishing characteristic of the UK’s business model is
that it plays host to an open and lightly regulated international financial services
centre concentrated within the City of London. Another is that the UK contains a
highly flexible labour market regime, consisting of limited employment protections,
high levels of atypical work and restrained levels of real wage growth. The UK’s
business model is also characterised by openness to international capital flows,
with extensive capital markets and a tax regime which is favourable to international
investors. Brexit is likely to impact in profound ways upon this national business
model.

Since the 1990s, the UK’s model of capitalism has been bolstered and sustained
by the country’s membership of the European Union (EU) and the Single Market.
Membership of the trading bloc granted UK firms access to a highly integrated eco-
nomic area with minimal non-tariff barriers and the so-called ‘passport’ for financial
services. As a result, around 50 per cent of UK exports became destined for the EU
throughout this period and UK manufacturers increasingly sourced components
from EU supply chains. Investment flows associated with the UK’s Single Market
membership increased such that the UK became a key destination for inward FDI
in the EU (Dhingra et al., 2016). The UK also became de facto ‘Europe’s investment
banker’ (Carney, 2017). At the same time, the UK’s ‘flexible’ labour market regime
was left relatively unscathed by supranational ‘social’ legislation. Negative ‘integra-
tion through law’ deepened economic integration but the UK’s labour market re-
mained relatively unencumbered by minimalist social and employment legislation
(Scharpf, 2010). As a result, despite a growing body of EU social and employment
law, the UK continued to contain some of the lowest levels of employment protec-
tions of any OECD state.

Is Brexit likely to lead to a deepening, a transcendence or reconfiguration of the
UK’s national business model? These questions are of huge importance to the de-
bate on Brexit and the future of the British capitalism. The UK’s national business
model is simultaneously dynamic and dysfunctional. It is associated with high levels
of employment, large inflows of FDI and in recent years strong growth relative to
the EU and Eurozone average. However, it also generates huge wealth and income
inequalities, precarious forms of work and stark regional inequalities. The UK’s in-
ternationalised and lightly regulated financial sector also poses a persistent threat
to (domestic) financial stability (Christensen et al., 2016). How Brexit is likely to
impact on the UK’s national business model is therefore a central issue, for aca-
demics, policymakers and citizens alike.

1 Sheffield Political Economy Research Institute (SPERI) Interdisciplinary Centre of the Social Sciences, 219 Portobello
  Sheffield, S1 4DP. Email: scott.lavery@sheffield.ac.uk
2 Department of Politics, University of York, Heslington, York, YO10 5DD. Email: lucia.quaglia@york.ac.uk
3 School of Politics and International Studies, University of Leeds. Email: ipicd@leeds.ac.uk

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model   5

This SPERI paper is drawn from contributions to a series of ‘White Rose’ workshops
which ran throughout 2016, held at the Universities of York, Sheffield and Leeds.
We wish to thank the White Rose for the funding provided and the Universities of
York, Sheffield and Leeds for hosting the workshops. The contributions chart the
ways in which the UK’s historic vote to leave the EU is likely to impact on the UK’s
distinctive model of capitalism. As outlined in the contributions below, Brexit has
important implications for the City of London, trade, the UK’s balance of payments,
labour markets, economic geography and EU integration more broadly. Brexit will
impact on the structure of the UK economy in profound and unanticipated ways.
But structural change is not determined simply by external, agentless forces. All so-
cial and political processes are mediated by political actors and social forces. The
‘form’ which Brexit takes, and whether this leads to a deepening, transcendence
or reconfiguration of the UK’s dysfunctional business model, is not preordained or
inevitable. We therefore hope that in this body of papers, we outline some of the
underlying constraints, challenges and opportunities which Brexit presents in the
contemporary period.

References
Carney, M. (2017) ‘The high road to a responsible, open financial system’. Available
at    http://www.bankofengland.co.uk/publications/Documents/speeches/2017/
speech973.pdf

Christensen, J., Shaxson, N., & Wigan, D. (2016) ‘The Finance Curse: Britain and the
World Economy’, The British Journal of Politics and International Relations, 18(1),
pp. 255-269.

Dhingra, S., Ottaviano, G., Sampson, T., & Reenen, J. Van. (2016) ‘The impact of Brex-
it on foreign investment in the UK’, The Centre for Economic Performance (CEP).
London School of Economics. Available at http://cep.lse.ac.uk/pubs/download/
brexit03.pdf

Scharpf, F. W. (2010) ‘The asymmetry of European integration, or why the EU can-
not be a ‘social market economy’’, Socio-Economic Review, 8(2), pp. 211–250.

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model                     6

The political economy of finance in the UK and
Brexit
Scott James4 and Lucia Quaglia
The variety of capitalism in the United Kingdom (UK) and the British ‘national busi-
ness model’ are characterised by a large, open, internationalised and competitive
financial sector as well as the status of London as a leading international financial
centre. Other distinctive features of this model have been the close government-
business relations in finance and the economic strength and political influence of
the financial services sector in the UK. Prior to the international financial crisis,
the ‘City-Treasury-Bank of England nexus’, which the Financial Services Authority
(FSA) later disrupted, was at the centre of British economic policy. This meant that
British policy-making institutions often made policy choices that served well the
interests of the financial sector domestically, in the European Union (EU) and inter-
nationally (Baker, 1999). Domestically, light touch regulation carried the day in the
UK. In the EU and internationally, British policy-makers promoted market-friendly
regulation (Quaglia, 2010).

Membership of the EU and the development of the Single Market in finance have
bolstered the UK’s national business model, in particular its large financial sector.
The UK had an open and competitive financial sector that was well positioned to
take advantage from the removal of financial barriers, the introduction of pass-
porting rights and the harmonisation of financial regulation across the EU. The EU
became the biggest market for UK exports of financial services, generating a trade
surplus of £15 billion, a third of the UK’s total trade surplus in financial services,
which totalled £46 billion in 2012. The UK’s financial services trade surplus with
the EU more than doubled over the past decade. About 70% of the EU’s foreign-
exchange trading and 40% of global trading in euros takes place in the UK. The UK
hosts 85% of the EU’s hedge-fund assets, 42% of EU private-equity funds, half of EU
investment bank activity, half of EU pension assets and international insurance pre-
miums (The CityUK, 2015). Over the last decades, the City greatly benefited from
the free movement of capital and labour within the EU. In turn, the success of the
financial sector was a driving force for the British economy and a linchpin of the UK
business model.

Over the past decade, two factors have contributed to the gradual decoupling of
the preferences of the UK government and the City of London. The first is the im-
pact of the global financial crisis. First, the influence of British policy-makers and
the City on EU financial regulation has diminished as continental policy-makers
sought to capitalise on the crisis, tipping the balance of regulatory power in the
EU in their favour (Quaglia, 2012). Second, the UK government’s preferences on
post-crisis financial regulation have become increasingly ‘Janus-faced’, pursuing
much tighter regulation for some financial sectors (banking), but not others (non-
banking). The shift has been driven by the need to restore financial stability and
public confidence in the wake of the bank bail-outs. This has forced regulators to

4 Department of Political Economy. Kings College London, Strand Building, Strand Campus, London WC2R 2LS. Email:
  scott.james@kcl.ac.uk

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model   7

impose amongst the highest capital requirements in the world for UK-based banks
and to introduce sweeping structural reforms aimed at ensuring that banks are no
longer ‘too big to fail’. In a stark reversal of pre-crisis experience, UK policy-makers
in Brussels have therefore frequently found themselves opposed by their own fi-
nancial industry, which on occasion has allied with France and Germany to resist
UK demands for tougher EU rules. By contrast, in other sectors of finance where
the political fall-out from the crisis has been far less pronounced, UK policy-makers
have resisted strengthened EU regulation (such as for hedge funds, rating agencies
and short selling) and continued to promote a liberalisation regulatory agenda (for
example, Capital Markets Union).

This post-crisis de-coupling has contributed to the further weakening of the tradi-
tional City-Treasury-Bank of England/FSA nexus. The crisis has increased the politi-
cal salience of financial regulation. The taxpayer-funded bail-outs and successive
industry scandals, such as Libor, led to heightened political scrutiny, culminating
with the establishment of the Parliamentary Commission on Banking Standards.
Post-crisis reform of banking supervision and regulation has also reconfigured in-
stitutional relationships. The FSA was dismantled and its supervisory role handed
back to the Bank of England. Since then the central bank has become the main ad-
vocate for stricter regulation, including strong support for the ‘ringfencing’ of retail
and investment banking activities (James, 2017). The Treasury’s traditional defence
of the City’s competitiveness has also been tempered by the need to restore do-
mestic financial stability: a trade-off that Chancellor George Osborne referred to as
the ‘British dilemma’ (Osborne, 2012). These developments have further strained
the quiet networks of influence through which the City traditionally exerts political
leverage within the UK polity.

The second factor that has contributed to the decoupling of UK government and
City of London preferences is Brexit. From 2010 to 2016 the City’s relationship with
the Cameron Government became increasingly difficult over Europe. For example,
although Cameron claimed that his ‘veto’ of the Fiscal Treaty in December 2011 was
about protecting the interests of the UK financial sector, it was also intended to
ensure that the domestic ringfencing reforms could be implemented in full. The fi-
nancial industry contributed constructively to the Coalition Government’s ‘balance
of competences’ review, although they made it clear that on the whole they sup-
ported the regulatory status quo. The City was increasingly concerned, however,
about the future regulatory implications of euro area caucusing and backed the
Prime Minister’s efforts to secure special protections as part of the government’s
renegotiation strategy. Although it maintained a low public profile during the sub-
sequent referendum campaign, the positions taken by the main trade associations
– TheCityUK and the British Bankers’ Association – were strongly supportive of the
UK’s continued membership of the EU as a critical source of London’s success as a
global financial hub.

The referendum result can be seen as an instance in which the City lost out
(Thompson, 2016) because the influence of the financial industry is greater when
policy making is insulated from public scrutiny and democratic politics. Brexit, like
financial regulation post crisis, was not an area of ‘quiet’ politics, removed from the
political limelight. On the contrary, it was an issue that was highly salient for the
public and was politically controversial. For this reason, the City was unable (and

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model   8

largely unwilling) to influence the increasingly febrile public debate. The threat of
the loss of business and lower profits for the financial sector were never likely to be
arguments that could mobilise public opinion against Brexit, or even in favour of the
‘soft’ options favoured by the City. More fundamentally, the interests and influence
of the City in shaping British EU policy since 2010 have been gradually ‘crowded out’
by the steady growth of domestic euroscepticism, epitomised by the rise of UKIP.
Hence, the defence of the interests of UK financial services, which dominated Cam-
eron’s early EU strategy from 2010-2013, has gradually been displaced by concern
over immigration, free movement and welfare entitlement. The City’s voice within
government has therefore been gradually marginalised as a result of the shifting
electoral incentives facing the Conservative party.

The City’s official response to Brexit masks deep-rooted industry divisions. Al-
though the largest trade associations were firmly in the pro-Remain camp, impor-
tant sections of the City supported the Leave campaign and established a rival ‘City
for Britain’ group. These divisions reflect divergent models of political economy
across different sub-sectors of finance, reinforced by their experience of post-cri-
sis regulatory reform. On one side of the divide is the banking sector, dominated
by a handful of large global firms concerned to maintain access to lucrative EU
financial markets. The UK government’s hawkish stance on bank capital since the
crisis also shaped its attitude during the referendum, as industry often found itself
supporting the EU’s efforts to resist UK demands (James, 2016).

The City’s main associations have responded to Brexit by gearing up their lobbying
capability in advance of the forthcoming negotiations. This led to the establishment
in August 2016 of the Financial Services EU Taskforce and Advisory Committee,
chaired by Baroness Vadera and composed of senior industry figures, to coordi-
nate the City’s response. In a series of position papers, the EU Taskforce initially
put forward proposals for a European Economic Area style arrangement or ‘spe-
cial deal’ for finance to preserve its membership/full access to the single market.
It soon became clear, however, that this was not politically palatable to either the
UK government or the EU institutions. Since then, lobbying has focused instead
on securing the best possible terms of access for UK banks to the single market
post-Brexit. To this end, various mechanisms have been touted, such as a broad use
of equivalence mechanisms and an ad hoc passporting (the so-called ‘Swiss-plus’
or ‘Canada-plus’ options). Overall, the City’s official position continues to favour a
‘soft’ Brexit with a long transitional period, a stance which has recently received
important political support from the Bank of England Governor, Mark Carney (Car-
ney, 2017). Despite these efforts, however, the historic fragmentation of the City’s
representation hampers the emergence of clear leadership or the articulation of a
coherent strategy.

In addition, a sizeable section of the City, centred on the diverse and fragmented
non-banking sector (which includes the private equity and hedge fund industries),
is more comfortable with the prospect of Brexit. These firms are less dependent
on EU markets and, prior to the crisis, largely unaffected by Brussels-based regula-
tion. Their view of Europe has been shaped by their post-crisis experience, par-
ticularly Franco-German led efforts to regulate the so-called ‘vultures’ of capitalism
(Woll, 2013). For many in the non-banking sector, Brexit constitutes a second ‘Big
Bang’ which will force the City to reorient itself away from Europe and towards the

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model   9

emerging market economies. To counter the influence of the EU Taskforce, pro-
Leave City figures have established the Financial Services Negotiating Forum, and
have been active in supporting the Global Britain and Leave Means Leave groups.
The ‘hyperglobalist’ view of the UK as an offshore financial hub which they promote
has important sympathisers within the May Government, including Brexit Secre-
tary David Davis and International Trade Secretary Liam Fox (Baker et al., 2002).

Brexit poses a significant challenge to the success of the financial sector and to
the pre-eminence of London as a global financial center. It also challenges the UK
business model. However, the effects of Brexit are likely to be differentiated across
the financial sector. They depend on the configuration of the financial sector, pass-
porting rights, equivalence provisions and the amount of financial services sector-
specific trade between the UK and the EU. Ultimately, the longer-term impact will
fundamentally depend on the ‘variety’ of Brexit that is enshrined in the transitional
and final ‘deal’ to be agreed by the UK and the EU.

References
Baker, A. (1999) ‘Nebuleuse and the ‘internationalization of the state’ in the UK?
The case of HM Treasury and the Bank of England’, Review of International Political
Economy, 6(1), pp. 79-100.

Baker, D., Gamble, A. and Hay, C. (2002) ‘Sovereign nations and global markets:
modern British Conservatism and hyperglobalism’, British Journal of Politics and
International Relations, 4 (3), pp. 399-428.

Carney, M. (2017) ‘Treasury Committee Oral evidence’, Bank of England Financial
Stability Reports, HC 549, 11th January 2017.

James, S. (2016) ‘The Domestic Politics of Financial Regulation: Informal Ratifica-
tion Games and the EU Capital Requirement Negotiations’, New Political Economy,
21(2), pp. 187-203.

James, S. (2017) ‘The Structural-Informational Power of Business: Signalling Games
and the Politics of UK Banking Reform’, Presented at the Political Studies Associa-
tion Annual Conference, Glasgow, April 2017.

Osborne, G. (2012) ‘Mansion House speech’, 14 June. Available at http://www.tel-
egraph.co.uk/finance/economics/9332318/George-Osbornes-Mansion-House-
speech-in-full.html

Quaglia, L. (2010) Governing Financial Services in the European Union. Routledge.
London.

Quaglia, L. (2012) ‘The “old” and “new” politics of financial services regulation in the
European Union’, New Political Economy, 17(4), pp. 515-535.

The CityUK (2015) ‘Key Facts about UK Financial and Related Professional Services’.
Available at https://www.thecityuk.com/assets/2015/Reports-PDF/Key-Facts-
about-UK-financial-and-related-professional-services-2015.pdf

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model   10

Thompson, H. (2016) ‘The impact of Brexit on the City and the British economic
model’, Diverging Capitalisms? series Brief No. 1. Available at http://speri.dept.shef.
ac.uk/wp-content/uploads/2016/07/Brief-1-The-impact-of-Brexit-on-the-City-and-
the-British-economic-model.pdf

Woll, C. (2013) ‘Lobbying under Pressure: The Effect of Salience on European Hedge
Fund Regulation’, Journal of Common Market Studies, 51 (3), pp. 555-572.

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model                          11

Taking back control? The discursive constraints on
post-Brexit trade policy
Gabriel Siles-Brügge5
While discussions about trade policy were not at the heart of the UK EU referen-
dum campaign, they were central to the post-Brexit visions of many Brexiteers, who
hoped to free Britain of the perceived constraints of EU trade policymaking. This
is still the case in the wake of the referendum. Brexit Secretary David Davis (2016),
for example, has spoken of creating a trade area ‘probably ten times the size’ of the
EU, with much talk before and since focusing on closer economic ties with Brit-
ain’s Commonwealth partners (Murray-Evans, 2016). This contribution asks what
we should make of such claims and aspirations, focusing on the ideational politi-
cal economy of a putative British trade policy. On one hand, the UK government
is increasingly aligned with the vision of a ‘Global Britain’, seeking increased trade
and investment liberalisation in the mould of its extant national business model.
However, the appeal to nativist rhetoric during the referendum campaign points to
important discursive constraints in realising this vision.

It is important to begin by emphasising that the EU’s external trade policy has,
over time, increasingly reflected the liberal preferences of the UK government
(see Johnson, 1998). While EEC/EC trade policy may have been marked in its early
decades by defensiveness over agriculture, the advent of the Single Market Pro-
gramme (SMP) in the mid-1980s eventually turned the EU into a decisively offensive
multilateralist. It saw its interests as promoting non-discriminatory trade liberalisa-
tion via the World Trade Organisation (WTO), especially in ‘new’ issue areas such
as services and investment. Under British Trade Commissioner Peter Mandelson,
the slow pace and eventual stagnation of the Doha Round of WTO trade talks saw
the EU turn from away its ‘multilateralism-first’ policy to pursue a slew of bilat-
eral trade agreements with the emerging markets of East Asia (Siles-Brügge, 2014).
Free trade agreement (FTA) negotiations with Canada (CETA, initiated in 2008 and
recently completed) and the US (TTIP, initiated in 2013, currently on hiatus) also
followed. Not only have successive British governments supported these EU-led
talks, but their advocates also include prominent Brexiteers, notably the now Sec-
retary of State for International Trade, Liam Fox (2017). This should not strike us as
entirely unsurprising. One of the central thrusts of this new generation of FTAs has
been deregulation (to an unprecedented extent in TTIP) by eliminating so-called
‘non-tariff barriers’ to trade (NTBs) – the term used to refer to (differences in) do-
mestic regulation such as food safety standards or local ownership requirements
for telecoms firms that may impede the free flow of goods, services and investment
(De Ville and Siles-Brügge, 2016).

Despite this, British Eurosceptics within the Conservative Party have long felt that
the EU has not gone far enough in the pursuit of free trade and deregulation. In
fact, some attribute the rise of contemporary elite British Euroscepticism to their
sense of ‘betrayal’ over the SMP. Having empowered supranational institutions with

5 Department of Politics and International Studies, Social Sciences Building, The University of Warwick, Coventry, CV4
  7AL. Email: G.Siles-Brugge@warwick.ac.uk

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model   12

the Single European Act in 1985 as a means of deregulating the European economic
space, many were incensed at then European Commission President Jacques De-
lors’s rhetoric and measures in pursuit of a ‘social Europe’ (Geddes, 2014). Much
vitriol was directed at the likes of the ‘Working Time Directive’, initially introduced
in 1993. To this were added ‘myths’ about ‘Commonwealth betrayal’ when Britain
joined the EC in 1973 and had to (in implementing the EU’s Common External Tariff)
abandon its existing Commonwealth Preference System. This saw the ‘Old Domin-
ions’ of Canada, Australia and New Zealand no longer offered preferential access
to the UK market (Murray-Evans, 2016). All in all, British Eurosceptics combined
a desire to see the UK embrace ‘globalisation’ (read, greater trade openness and
economic deregulation) à la Singapore with a nationalist argument about foreign
regulatory and protectionist impositions on a (once) proud mercantile power still
maintaining a privileged relationship with its former colonies (Baker et al., 2002).

Such arguments, however, were unlikely to win over adherents to the Leave cause
during the referendum. As Vote Leave’s Campaign Director Dominic Cummings
(2017) so starkly put it in a blog post on ‘how the Brexit referendum was won’, ‘their
“go global” message was a total loser’. Instead of an (admittedly consistent) combi-
nation of nationalist and ‘hyperglobalist’ arguments in favour of greater economic
openness, both Leave campaigns focused around a set of simpler slogans: ‘taking
back control’ (Vote Leave) and ‘taking our country back’ (Leave.EU). In doing so,
they were appealing to a set of ideas that, in the words of Béland and Cox (2016:
432) possessed ‘a high, positive valence engender[ing] strong attractiveness’ and
were thus effective ‘coalition magnets’. ‘Valence’, the ‘emotional quality’ of certain
ideas (Béland and Cox, 2016: 432) also often goes hand in hand with ‘polysemy’ (or
ambiguity, the ability of ideas to be interpreted in multiple ways) as more abstract
ideas ‘evoke more fundamental levels of a person’s identity’ (Cox and Béland 2013:
316). Thus, the key message on immigration from the Leave campaigns was both
that the EU was a source of ‘uncontrolled’ immigration (which could easily be read
as there being too many immigrants) but also that an ‘Australian points-based sys-
tem’ should be implemented (which, as a number of commentators pointed out, is
actually more liberal on immigration than much of the current UK regime (see Mc-
Ternan, 2016). On trade, ‘taking back control’, meant both realising Britain’s global
vision unconstrained by the protectionist EU and protecting the UK from the de-
regulatory instincts of the Brussels elite, which in TTIP were said to be threatening
the public provision of healthcare in the NHS (Siles-Brügge, 2016).

There were thus underlying tensions in the referendum campaign between the lib-
eral economic instincts of many of the long-time British Conservative eurosceptics
and the (economic and other) nativism of much of the Leave rhetoric. This was ar-
guably key to putting together a winning ‘coalition’ of voters with traditionalist views
and those who felt ‘left behind’ by globalisation (although both did often overlap
(see Goodwin and Heath, 2016; Kaufmann, 2016). The tensions have, however, also
bubbled to the surface under the present government. At the Conservative Party
Conference Theresa May adopted a more interventionist line on the role of the
state (what elsewhere has been called her vision of the ‘protective state’ (Davies,
2016), speaking of the need ‘to correct unfairness and injustice and put government
at the service of ordinary working people’ and of the negative impact of ‘low-skilled
immigration’ on wages (May, 2016). Amber Rudd, the Home Secretary, followed by
presenting a plan to force companies to publish the number of foreign workers

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model   13

they employed. Some leading ‘liberal Leave’ voices, such as The Spectator’s editor
Fraser Nelson (2016) thus bemoaned that with former Remainers calling the shots
in government, ‘it is the very opposite to the direction the Brexiteers would have
taken had any of them gone on to succeed’.

Since then, however, the government (and especially, Theresa May’s) approach to
and discourse on Brexit has returned to the more traditional Conservative Euro-
sceptic marriage of ‘hyperglobalism’ and nationalism. In her January 2017 speech
on Brexit she spoke of how ‘the British people […] voted to leave the European
Union and embrace the world’ as a ‘truly Global Britain’. What is more, she approv-
ingly quoted the views of those ‘in Britain [who] have always felt that the United
Kingdom’s place in the European Union came at the expense of our global ties, and
of a bolder embrace of free trade with the wider world.’ Britain is to leave the EU’s
Internal Market and customs union and pursue an ambitious, independent trade
policy targeting ‘the fastest growing export markets in the world’ (May, 2017). The
government White Paper released at the same time as May’s speech, speaks of ‘the
UK’s ambitions for deepening trade and investment relations with the wider world’.
It cites the ‘interest’ ‘expressed’ or the preliminary discussions already taking place
with China, Brazil, the Gulf states, Australia, New Zealand, India and the US. (HM
Government, 2017: 55). The broad strategy therefore is one of fostering even more
cross-border flows of services and investment, which means that (at least in trade
policy) the UK’s approach on trade is thus more in line with consolidating its exist-
ing national business model rather than embracing a more interventionist role for
the state.

Appealing to both nativist and liberal economic arguments may have been feasible
during the course of the referendum campaign by speaking in the emotive and
ambiguous language of ‘taking back control’. It may also work to keep the ‘coali-
tion’ in place in the wake of Theresa May’s proposals for ‘hard Brexit’, as leaving the
EU’s Internal Market appeals to both those concerned about immigration as well as
those committed to a vision of a ‘Global Britain’ signing its own trade agreements.
But there are grounds for thinking that this discursive strategy may come to haunt
and/or constrain the architects of this ‘truly Global Britain’ as the distributive and
broader policy impacts of the UK’s post-Brexit trade policy play out. Here I provide
a couple of examples by focusing on two of Britain’s much-vaunted partners: the
US and India.

The UK government has been especially keen on an FTA with the US, with much hay
made by Brexiteers following the election of Donald Trump of Britain’s move ‘to the
front of the queue’ (after Barack Obama intimated Britain would be a lesser priority
for trade talks than the EU during the referendum campaign). But liberalising trade
with the US raises issues regarding the potential distributional impacts of such
an FTA, especially with a President who has actively espoused quite mercantilist
views. It is, for example, relevant in the case of UK farmers, as the UK’s agricultural
market remains relative closed under the EU’s CET, Common Agricultural Policy
(which extensively subsidises domestic agriculture) and more restrictive Sanitary
and Phytosanitary regime (laws related to animal and plant health and safety, e.g.
the EU bans the use of hormones in beef production). US agribusiness, has been
frustrated at the lack of progress in the TTIP talks on such issues, will likely be more
influential in talks marked by asymmetric market size, with smaller-scale UK farm-

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model   14

ers (many of which appeared to support Brexit) facing the prospect of increased
competition from more markedly industrial-scale agriculture (see Beattie, 2017).
Similarly, US pharmaceutical producers are likely to push for concessions on UK
pricing and reimbursement policies for medicines in order to achieve more com-
petitive market conditions. This could potentially could drive up the cost of medi-
cines for the NHS (on pricing and reimbursement in FTAs, see Lopert and Gleeson,
2013) and add to the longer-term sustainability issues faced by the organisation.

The other example is India, with which the EU had been negotiating an FTA since
2007. In advance of one of her first foreign visits as Prime Minister, May spoke in
November 2016 of the possibility to ‘reboot[…] an age-old relationship in this age of
opportunity’ (cited in HM Government, 2016), with a UK-India Trade Working Group
having already been established in September 2016. But what became apparent
during the state visit was that the UK’s position regarding one of India’s key areas of
interest remained the same as during the EU-India FTA talks (Asthana and Stewart,
2016). Here, Theresa May’s Home Office had been one of the main stumbling blocks
during the negotiations over its opposition to the liberalisation of ‘Mode 4’ services
delivery for Indian suppliers, namely the (temporary) movement of natural persons
to deliver a service (such as intra-corporate transferees) (see Siles-Brügge, 2012).
If the issue was contentious then, the post-referendum landscape on Mode 4 and
the wider issue of immigration and visa relaxation looks even more fraught.

The potential impacts of trade agreements (notably the distributive sort associ-
ated with increased competition in agriculture or increased prices for pharma-
ceuticals), are of course often not just discursive. But what is crucial for my pur-
poses is to highlight how it might undo the ‘winning’ narrative in favour of Brexit
that still appears to legitimate the government’s approach – if opinion polls putting
the Conservatives consistently in the lead post-referendum are anything to go by.
So far, as the psephologist John Curtice (2016) has highlighted, the British public
appears to have no regrets over voting for Brexit and assumes that there are no
‘trade-offs’, such as between continued unfettered access to (or, more accurately,
participation in) the EU’s Internal Market and accepting freedom of movement of
people – or between ‘sovereignty’ and a ‘Global Britain’. Earlier I mentioned in pass-
ing that Conservative Eurosceptics were consistent when they married nationalism
and ‘hyperglobalism’. This is because they ‘welcomed’ ‘the national policy-making
constraints of globalisation […] [as] they rule out the kind of social democratic and
socialist measures which are viewed as incompatible with British national identity,
forcing the government to set the people free whatever its ideological predilec-
tions’ (Baker et al., 2002: 409). While this is the vision of Brexit currently being pur-
sued by the UK government, it hardly has the wider resonance of ‘taking back con-
trol’, especially if it means hurting farmers or making medicines more expensive.

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model   15

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SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model                      17

Paying Our Way in the World? Visible and Invisible
Dangers of Brexit
Jonathan Perraton6
The UK economy has long been associated with a weak balance of payments. This re-
flects the underlying growth model: demand has been reliant on private household
consumption and deficits in goods trade have been offset by surpluses in services
trade and foreign investment earnings. The financial services industry is central to
Britain’s external position. The Single Market provided wider markets for the UK,
but did not fundamentally alter Britain’s structural weaknesses as evidenced by the
deficit with the rest of the EU. The Brexit vote took place against the background
of Britain running its largest peacetime current account deficit, despite subdued
economic activity; since then sterling has fallen sharply. Financing Britain’s external
position represents a key challenge post-Brexit. Post-Brexit models of British politi-
cal economy partially address this. Proposals for a ‘Singapore’ type model would
accentuate key aspects of the current British model; its proponents see opportuni-
ties to pursue further trade agreements, particularly in services trade. Alternative
proposals floated in terms of a new industrial strategy for Britain could provide
the basis for a reorientation of the British economy towards key exports industries
and a more interventionist state regime. Any emergent model will critically depend
on the nature of the Brexit deal with the EU, not least in terms of the position of
the City of London. This paper sets out the recent evolution of the UK’s current ac-
count position, particularly in relation to the EU. It then highlights particular areas
of potential disruption from Brexit and sketches out scenarios of possible evolution
of Britain’s external position in response to this.

In 2015 the United Kingdom current account deficit hit a peacetime record of more
than 5 per cent of GDP7; although it has fallen back since it remains high. By defini-
tion such a deficit requires overseas financing, leading Bank of England governor
Mark Carney (channelling Blanche DuBois) to comment that Britain is now relying
on ‘kindness of strangers’ to finance this deficit. It is widely held that a country’s
current account enters the danger zone for sustainability at around 5 per cent of
GDP; indeed, the 5 per cent limit is often taken as an early warning indicator for cri-
ses in emerging economies. There are of course fundamental differences between
Britain and the emerging economies, but Brexit still poses an unprecedented chal-
lenge for the British economy. The potential impact of Brexit on Britain’s trading
relations and its ability to attract foreign investment is central to the expected
negative effects on the economy. Much of the discussion has focused on the direct
impacts of Brexit on trade, but the effects on the capital account are key too as the
UK will continue to have to attract inflows to offset the current account deficit.

6 Department of Economics, University of Sheffield, 9 Mappin Street S1 4DT. Email: j.perraton@sheffield.ac.uk
7 See further my SPERI blog post ‘The UK balance of payments: in the ‘Red Signal’ zone?’, http://speri.dept.shef.
  ac.uk/2015/02/03/uk-balance-payments-red-signal-zone/

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model   18

                             Figure 1: UK Current Account

More generally, balance of payments considerations are central to the operation of
the British economic model. The ‘privatised Keynesianism’ (Crouch, 2009) under-
lying the British economic model has led to recurrent consumer spending booms
based on rising property prices; the rising household debt and falling savings as-
sociated with these consumption booms have led to worsening trade deficits.
Britain’s longstanding deficit on manufactures trade has been partially offset by a
surplus on services exports. Successive administrations have effectively banked on
Britain being able to build on its relative advantage in services in the context of an
expected global expansion in services trade. The position of the City of London, and
the financial services sector generally, has been central to this strategy. Brexit has
the potential to disrupt these arrangements.

Brexit – The Short Run Impact

Before the referendum official analysis predicted a range of negative developments
in the event of a Brexit vote (HM Treasury, 2016a) with independent forecasters
making similar predictions. As a number of commentators have noted, of these
predictions thus far only the fall in sterling appears to have materialised. The econ-
omy did not fall into a recession with rising unemployment; instead the economy
continued to grow, albeit fuelled by consumer expenditure as household savings
rates have fallen to record lows and there has been a marked expansion in per-
sonal credit. The Bank of England has effectively signalled that it will accommodate
the higher inflation arising from higher import prices as sterling fell. With limited
wage growth, though, rising import prices will lead to a squeeze on living standards.
Corporate investment remains subdued, particularly with heightened uncertainty
over Brexit. The Office for Budget Responsibility (OBR) is forecasting a slowdown in
growth as the consumer boom passes; even this growth projection is based in part
on optimistic projections of investment (OBR, 2017).

SPERI Paper No. 41 – The Political Economy of Brexit and the UK’s National Business Model   19

Moreover, the record current account deficit occurred at a time when, although
economic activity was recovering, it was not particularly strong. By comparison,
the only occasions in the post-war period when the UK had a comparable current
account deficit were in the mid-1970s during the oil crisis and in the late 1980s at
the height of the Lawson boom. The projected narrowing of the current account
deficit reflects expectations of slowing growth in consumer demand and a reduc-
tion in the budget deficit, as well as improvements on net earnings on UK invest-
ment overseas. A fall in sterling might be expected to boost exports, but there are
limitations here. Following the referendum vote sterling has fallen to levels relative
to major trading currencies not seen at least since the early 1990s.

As recent Bank of England analysis notes (Broadbent, 2017), this will not neces-
sarily lead to higher investment in export industries – if the fall in sterling is in an-
ticipation of Brexit then this presumably reflects higher expected costs of trading;
alternatively, the fall may, at least in part, be a temporary response to short run
developments – if so, sterling’s fall would be expected to be temporary. Either way,
sterling’s post-referendum fall provides limited incentives for longer term invest-
ment in trading capacity. SPERI research into the effects of the earlier fall of ster-
ling from 2009 showed only limited improvements in export performance as many
companies used a lower pound to raise their margins rather than expand overseas
sales (SPERI, 2014). The UK continues to run a substantial current account deficit;
the fall in sterling since the referendum vote is likely to reduce that deficit, but
through squeezing living standards and hence consumer expenditure on imports
rather than through a lasting increase in trading capacity.

Brexit – The Medium Term Impact

The limited impact of the Brexit vote thus far may simply reflect that so far little
has actually changed – the UK remains an EU member. The longer term expected
negative impacts of Brexit are primarily expected to operate through its impact on
trade and foreign investment. There is obviously considerable uncertainty over the
impact of Brexit, not least over the nature of the final arrangements after leaving
the EU. Treasury forecasts before the referendum predicted that GDP would be
around 3-6 per cent lower against a baseline, depending on the nature of the final
settlement (HM Treasury, 2016b). Most forecasts made similar loss projections,
some warning that a hard Brexit in particular could lead to even higher losses with
a relatively ‘hard’ Brexit of the order of 6-10 per cent of GDP (e.g. Van Reenen,
2017). Brexit would be expected to lead to a loss of trade and inward investment;
beyond the direct impact on income, this would also be expected to feed through
into lower productivity growth in the context of particularly weak UK productivity
performance since the 2007/08 financial crisis. There are clearly margins of er-
ror around these estimates; some studies have highlighted a number of limitations
in the Treasury results, particularly as an analysis of the UK’s likely position (cf.
Gudgen et al., 2017).

The EU accounts for around 45 per cent of British exports, a large share that has
fallen over recent years with relatively weak growth in the Euro-zone. Britain has a
persistent deficit in goods trade with the EU, partially offset by a positive balance in
services trade. The UK has a small surplus with the rest of the world (chiefly with
the US).